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Why it pays to invest in good management

A recent presentation by Mr Chris Mayer at the 8th Annual Value Investing Congress provided some interesting research on the benefit of investing in companies with quality management that is worth repeating.

In his presentation Mr Mayer explained how he focusses on investing in companies that have what he terms owner-operators. Owner-operators can take a number of forms including founder-run, family-run and investor-run businesses. As Mayer puts it, the main thing he’s looking for in management is:

  • Skin in the game
  • Incentives that line up with shareholders
  • A track record

What’s interesting is that while inherently this makes sense and, indeed, is a requirement for many investors, is that Mayer has statistics to back up his reasoning. According to research conducted by Horizon Kinetics and published in the Wall Street Journal an index composed of companies whose wealthy insiders hold substantial stakes has beaten the S&P 500 by 2.7% annually on average over the past 20 years!

Over a 20-year period 2.7% adds up and puts into context why investors should focus intently on who is running their companies and also why they should hold the board to account and vote at meetings.

So why do companies with owner-operators outperform the index? Most likely an important factor is that owner-operators think long-term while ‘outsiders’ are more likely to only think as far as their next bonus. Here are three companies where the managers have skin in the game and a habit of thinking long-term.

Seek (ASX: SEK) is an example of a company run by its founder. Andrew Basset was a co-founder of the online job advertiser in 1997. He has been involved with the company through all its stages of development and today retains the position of Chief Executive Officer.

Reece Australia (ASX: REH) is an example of a family-run company. The plumbing supplies company was founded by Harold Reece in 1919 and listed on the ASX in 1954. In 1969 the Wilson family became involved with Reece, an association which remains to this day with four members of the family sitting on the board.

Domino’s Pizza Enterprises (ASX: DMP) is an example of an investor-run business. Don Meij  is synonymous with the pizza chain having built up a network of franchised stores, which he then sold to Domino’s. In the process he has become a significant shareholder and CEO of the company.

TimChart

Source: Google Finance

Foolish takeaway

An you can see from the chart above, these three companies — all run by management teams that can be described as owner-operators — have smashed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).

Investors who concentrate on identifying companies with management who have their interests aligned with shareholders have a good chance of discovering high quality companies with the potential to provide market-beating returns.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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